BSE SENSEX S&P CNX 17,085 5,139 20 October 2011 2QFY12 Results Update Sector: Metals Hindustan Zinc CMP: INR121 TP: INR193 Buy Bloomberg HZ IN Equity Shares (m) 4,225.3 52-Week Range (INR) 155/109 1,6,12 Rel. Perf. (%) -10/-5/12 M.Cap. (INR b) 512.5 M.Cap. (USD b) 10.4 Consolidated Hindustan Zinc s (HZ) 2QFY12 adjusted PAT declined 9% QoQ to INR13.6b, below our estimate of INR15.2b, due to lower zinc metal volumes and the absence of sales of lead concentrate. Mine production was on expected lines. Net sales declined 7% QoQ to INR26.4b due to lower zinc metal volumes, absence of concentrate sales and shrinkage in regional price premium over LME. Production of refined zinc declined 4% QoQ to 185k tons due to maintenance shutdown of a roaster. However, mine production increased 10% QoQ to 186k tons due to an increased contribution from SK mines. HZ commissioned a 100ktpa lead smelter at Dariba, raising zinc and lead metal capacity to 1.064mtpa. HZ expects to commission a 350tpa silver refinery in 3QFY12, which will boost silver volumes. HZ expects to expand silver production capacity to 500tons by early FY13. HZ s EBITDA declined 8% QoQ to INR14.6b due to a shortfall in revenue. The net zinc metal cost without royalty declined 3% QoQ to USD847/ton. Royalty as a percentage of sales was higher in 2QFY12 at 8.1% v/s 6.8% in 1QFY12 due to higher production at its Rampura Agucha and SK mines. Considering its strong balance sheet and investor demand for higher dividend payout, HZ s board of directors decided to move towards a percentage of profits method in distributing dividend. HZ announced interim dividend of 75% (INR1.5/share). We are positive on stock due to the strong volume growth of zinc metal and sharper growth in lead and silver production over the next few years. Maintain Buy. Sanjay Jain (SanjayJain@MotilalOswal.com);Tel:+9122 39825412/ Tushar Chaudhari (Tushar.Chaudhari@MotilalOswal.com); +9122 39825425
Hindustan Zinc s (HZ) 2QFY12 adjusted PAT declined 9% QoQ to INR13.6b, below our estimate of INR15.2b, due to lower zinc metal volumes and the absence of sales of lead concentrate. Mine production was on expected lines. Net sales declined sequentially due to lower zinc volumes, reduced metal premiums; New silver refinery to boost volumes in 2HFY12 Net sales declined 7% QoQ to INR26.4b due to lower zinc metal volumes, absence of concentrate sales and shrinkage in regional price premium over LME. LME zinc prices were sequentially flat at USD2,275/ton and lead prices declined 1.7% QoQ to USD2,488/ton. However regional premiums declined QoQ. Lead premium declined sharply to 6% from 12% in 1QFY12. Silver realizations were up 3.6% QoQ at INR57,746/kg. Production of refined zinc declined 4% QoQ to 185k tons due to maintenance shutdown of a roaster. However, mine production increased 10% QoQ to 186k tons due to increased contribution from SK mine. SK mine is set to ramp up production to 2mtpa by the end of FY12. Lead production was 15,657 tons and silver production was 42,081 kg (net of internal consumption) in 2QFY12. Silver contributed INR2.4b to net sales. HZ commissioned a 100ktpa lead smelter at Dariba, raising zinc and lead metal capacity to 1.064mtpa. It expects to commission a 350tpa silver refinery in 3QFY12, which will boost silver volumes. HZ expects to expand silver production capacity to 500tons by early FY13. EBITDA declines 8% QoQ; Cost of production (without royalty) USD847/ton HZ s 2QFY12 EBITDA declined 8% QoQ to INR14.6b, lower than our estimate of INR15.9b, due to a shortfall in revenue. The net zinc metal cost without royalty (CoP) declined 3% QoQ to USD847/ton. However in rupee terms, CoP was only marginally lower. HZ expects CoP of zinc to remain low in 2HFY12 due to HZ s stringent cost control measures. It expects FY12 CoP to be ~USD850/ton. Price realization of metals, by products (INR/ton) 160,000 120,000 80,000 40,000 Refined Zinc Refined Lead Silver (INR/kg; RHS) 60,000 50,000 40,000 30,000 0 20,000 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 Source: Company/MOSL 20 October 2011 2
Maintenance shutdown of roaster affected zinc production in 2QFY12 240 Refined Zinc Refined Lead Silver (RHS) 56 000 tons 180 120 60 42 28 14 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 tons 4QFY11 1QFY12 2QFY12 0 Source: Company/MOSL Dividend raised; Strong growth in metal production in 2HFY12; Maintain Buy Considering its strong balance sheet and investor demand for higher dividend payout, HZ s board of directors reviewed its dividend payment policy and decided to move towards the percentage of profits method. It announced interim dividend of 75% (INR1.5/share). Cash and equivalents increased by INR5.7b QoQ to INR163b, of which INR103b was invested in debt mutual funds. HZ is considering options to deploy this cash in its core business, including green-field and inorganic expansion. HZ commissioned a 100ktpa lead smelter at Dariba in 2QFY12 and expects it to ramp up lead production in 2HFY12. This will drive lead and silver volumes in FY13. HZ is committed to increasing mine metal production. Production at SK mine will ramp up to 2mtpa by the end of FY12. The mining work at its underground Kayar mine has commenced and HZ expects its first ore production by 1QFY14. We remain positive on the stock due to the strong volume growth of zinc metal and sharper growth in lead and silver production over the next few years. The stock trades at an EV/EBITDA of 3.1x FY13E and P/E of 7.2x FY13E assuming zinc and lead prices of USD2,200/ton and a rupee-us dollar exchange rate of 45. Maintain Buy. 20 October 2011 3
Hindustan Zinc: an investment profile Company description Hindustan Zinc (HZ) is a fully integrated zinc producer, with one of the best mining assets in the world. It steadily increased its reserves and production through regular investment in exploration and augmenting smelting capacity. HZ's captive mines of zinc and lead ore are located in Rajasthan, where it has total reserves of 313.2mt, equivalent to 34.7mt of refined zinc and lead MIC (metal in concentrate). Its captive mines and thermal power plants give HZ a significant cost advantage, making it one of the lowest-cost producers of zinc in the world. Sterlite Industries has 64.9% stake in HZ and 29.5% is owned by the government of India. Key investment arguments With HZ's recently commissioned 100ktpa lead smelter at Dariba, it has become the world's largest integrated zinc-lead producer with total smelting capacity of 1.064mtpa. This lead smelter, along with a 350tpa silver refinery (to be commissioned in 3QFY12), will drive lead and silver volumes over FY11-13. HZ expects silver production capacity to be 500 tons by early FY13. HZ will be the major beneficiary of the currently strong silver prices. HZ's cost of production is among the lowest in the world due to its fully integrated operations and large resource base. Key investment risks An unexpected fall in LME zinc prices will adversely impact earnings. Recent developments HZ's board of directors has recommended interim dividend of 75% (INR1.5/share) for FY12. Valuation and view The stock trades at an EV/EBITDA of 3.1x FY13E and P/E of 7.2x FY13E. Maintain Buy. Sector view Zinc is our most preferred base metal because of its favorable demand outlook and constraints in supply growth due to shortage of large scale low cost mines in the world. Comparative valuations Hindustan Zinc HNDL NALCO P/E (x) FY12E 8.2 7.1 12.2 FY13E 7.2 6.8 9.4 P/BV (x) FY12E 1.8 1.3 1.3 FY13E 1.5 1.1 1.2 EV/Sales (x) FY12E 2.6 0.6 1.4 FY13E 1.8 0.6 1.1 EV/EBITDA (x) FY12E 4.5 5.4 5.3 FY13E 3.1 5.1 3.4 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY12 14.8 13.8 6.9 FY13 16.8 15.3 9.5 Target Price and Recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 121 193 59.5 Buy Stock performance (1 year) 160 Hindustan Zinc Sensex - Rebased Shareholding pattern (%) Sep-11 Jun-11 Sep-10 Promoter 64.9 64.9 94.5 Domestic Inst 1.8 1.9 1.9 Foreign 1.4 1.5 1.7 Others 32.0 31.7 2.0 140 120 100 80 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 20 October 2011 4
Financials and Valuations 20 October 2011 5
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